Oligopoly Dynamics with Barriers to Entry
43 Pages Posted: 22 Dec 2006
Date Written: November 2006
This paper considers the effects of raising the cost of entry for potential competitors on infinite-horizon Markov-perfect industry dynamics with ongoing demand uncertainty. All entrants serving the model industry incur sunk costs, and exit avoids future fixed costs. We focus on the unique equilibrium with last-in first-out expectations: a firm never exits before a younger rival does. When an industry can support at most two firms, we prove that raising barriers to a second producer's entry increases the probability that some firm will serve the industry and decreases its long-run entry and exit rates. In numerical examples with more than two firms, imposing a barrier to entry stabilizes industry structure.
Keywords: LIFO, FIFO, Sunk costs, Markov-perfect equilibrium
JEL Classification: L13, L41
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